Bankruptcy and consumer proposal: what’s the difference?

Bankruptcy and consumer proposal are legal remedies that can settle a debt that you may not be able to pay. Each have its pros and cons. So, read on to learn more about them!


Get started with your financial recovery today

coins formed the word "debt"
Learn about two legal ways to get out of debt. Source: Pixabay

Indeed, there come times when debts and collections become too heavy to carry. In these moments, you have two legal resources to support you: bankruptcy and a consumer proposal.

However, what are they? What is the difference between these? Which of these is the best option for you? We’ll answer every question without the legal jargon so you can really understand.

Sign with the words EMERGENCY PULL

How to build an emergency fund: easy guide for beginners

Understand how to build an emergency fund and how having this resource can save your finances when something unexpected happens.

So, read this article and understand how you can get rid of debt in the best way possible:

What is bankruptcy?

In fact, before choosing between bankruptcy and a consumer proposal, it is important to understand what each of these options is.

Well, bankruptcy is a legally valid formal declaration that you cannot repay a debt. When you issue this statement, you still have to pay what you owe. However, you will do it another way.

In some cases, you may lose some assets to a creditor as a way to reduce your debt. Another way to pay off this debt is through fixed monthly payments.

These are typically calculated based on your monthly budget and revenue reports. In some cases, your debt is not fully paid off before it is closed.

The moment someone declares bankruptcy, they can no longer receive charges of any kind.

Thus, calls or collection letters become part of the past. By law, a bankruptcy process must last from 9 to 21 months.

After that period, you will no longer have to worry about debt. In fact, you can consider it paid. However, legal measures like this leave a bad mark on its track record for a long time.

The bankruptcy notice (the dreaded R9) can stay on your credit history for up to 7 years after completion. During this period, your credit score will suffer.

Therefore, it will be more difficult to get good loans, mortgages, and credit cards. A bankruptcy case can be filed for debts starting at $10,000. Many people get goosebumps just hearing that word.

Others look at it like it’s the end of everything. However, this is a mistake that has cost many lives.

In fact, there are many people who went bankrupt (more than once) and became financially successful later on. If you are considering filing for bankruptcy, keep this in mind.

Watering can watering money

Getting started with investing: 13 best tips for beginners

Start investing in the stock market the right way: read on to get some very important tips for beginners in the investment world.

What is a consumer proposal?

Two people signing documents (bankruptcy and consumer proposal)
Seeking a deal can sometimes be a way out of your debts. Source: Pixabay

In turn, a consumer proposal is like an invitation to an agreement. In this case, it is as if you declared to your creditors that you could not pay a debt.

That way, you can negotiate with them on a form of payment. In a consumer proposal, you will not lose any of your assets.

Generally, what happens is the payment of a certain percentage of the debt in monthly installments. These payments must last a maximum of 5 years. After that, you are forever debt free.

At the beginning of this process, a percentage of the debt that will be paid is negotiated. In fact, the minimum percentage can be 20%. The negotiation proposal is issued to all creditors.

However, the main opinion is issued by the creditor who holds the highest percentage of the debt. If the consumer agrees to the proposal, the consumer’s proposal process is opened.

To utilize these funds, your accumulated debt usually cannot exceed $250,000. This maximum limit does not include debt arising from mortgages.

This is typically considered a smoother way out of debt. However, it will also leave marks on your credit history. If you use this type of reconciliation, your report will receive an R7 rating.

Theoretically, this should generate a lower loss than an R9 rating. However, some banks tend to understand them as equivalent.

So the damage to your credit score and all that it entails will be pretty much the same. Also, the R7 rating will remain in your history until 6 after this process ends.

Finally, this is not a very well-known trading modality. However, it is extremely useful as it can preserve your assets.

How are they different?

So that you know the difference between bankruptcy and a consumer proposal, we put together a table. Here are the main differences that you need to pay attention to:

BankruptcyConsumer proposal
Maximum/minimum amount of debt requiredUsually, no minimumMaximum $250,000
Payment/negotiation methodMonthly payments based on income and incomeFixed monthly payment until reaching a minimum percentage of 20% of the debt
DurationFrom 9 to 21 months (or around 3 years)Up to 5 years (no fine in case of early settlement)
Preserves assetsNoYes
Impact on credit historyR9 rating (remains for up to 7 years after completion of the process)R7 rating (remains for up to 6 years after completion of the process)

Which one is the right option for your finances: bankruptcy or consumer proposal?

sign that says "bankruptcy"
Bankruptcy is not always the end: learn about the advantages of having this resource. Source: Pixabay

Now, you already know the difference between bankruptcy and a consumer proposal. However, a question remains: how do I know which of these is more advantageous for me?

In fact, we asked subject matter experts this very question. In fact, this question can be answered from various points of life. To understand better, see the following topics:

Do you have many assets?

If you have a lot of assets, you might want to preserve them. So, in order not to lose them as part of your debt payment, make a consumer proposal.

Want predictability in payments?

In a consumer proposal, your payment is set at the beginning and remains the same until completion. When you choose bankruptcy, things are not like this: if your income goes up, so do your payments.

Stick with the consumer proposal if you want predictability in payments.

Is your debt too high?

If your debt is more than $250,000, the only possible option is bankruptcy.

Are you in a hurry to complete this process?

A consumer proposal can last a long five years. On the other hand, bankruptcy cannot go beyond 21 months.

Are you unable to pay your debt?

In such cases, bankruptcy may be the solution. In effect, you will lose some of your assets, but you will be debt free. Also, you won’t lose everything. Rules for asset exemption may vary between provinces.

However, food, fuel, clothing, furniture, appliances, medical care, a car, your home, and work tools cannot be confiscated.

In fact, many bankruptcy and consumer proposals could be avoided. All you need is a little mastery of basic financial management tools. To start learning about this subject, take a look at our post below!

Person using calculator and cellphone

What is budgeting? 7 easy tips to improve your money management!

"What is budgeting" is the question that, when answered, changes your financial life. Learn about the power of this feature!

About the author  /  José Gonçalo

I started reading about finance only to find better options than savings. Since then, I have never stopped studying finance, and I believe that writing about it is the best way to help individuals feel fulfilled and have a healthy financial life. Today, I balance finance and medical school studies.

Trending Topics


Unlocking Your Path to Success: Funding U Student Loan Review

Discover how Funding U Student Loan can provide the financial support you need for college by reading our comprehensive review!

Keep Reading

H&R Block Emerald Prepaid Mastercard® full review: should you get it?

H&R Block Emerald Prepaid Mastercard® is easy access to your tax refunds and many other services free of many fees. Read on to learn more!

Keep Reading

Provident Loan: ¡Préstamos por el valor de tus joyas!

Con Provident Loan, consigue el dinero que necesitas sin una calificación de crédito perfecta ¡Sólo con garantía sobre tus joyas! Conócelo.

Keep Reading

You may also like


Petal® 2 “Cash Back, No Fees” Visa® Credit Card full review: should you get it?

Petal® 2 “Cash Back, No Fees” Visa® Credit Card allows you to build credit by earning up to 10% bonus cash back. Learn more!

Keep Reading

Personal loan: what is it and how does it work?

Understanding what is a personal loan gives you the ability to use this resource intelligently and escape unnecessary debt. Learn more here!

Keep Reading

Allegiant World Mastercard® full review: should you get it?

Allegiant World Mastercard® is a card that will give you access to a rewards program that will guarantee you free air travel! Know more!

Keep Reading